Public Foundation vs Private Foundation in Canada: Key Differences Explained

When establishing a charitable organization in Canada, understanding the difference between a public foundation and a private foundation is crucial. Both must be set up as corporations or trusts and registered with the Canada Revenue Agency (CRA) to obtain tax-exempt status. However, their governance, funding sources, and operational rules differ significantly.

What Is a Foundation?

A foundation is a type of charity that provides funding or services to support charitable causes. Foundations can either:

• Distribute funds to other charities (grant-making).
• Run their own charitable programs.

What Does a Foundation Do?

Foundations play a vital role in philanthropy by:

• Supporting other nonprofits through grants.
• Funding research, education, and social programs.
• Managing endowments to ensure long-term charitable impact.

Public Foundation vs. Private Foundation: Key Differences

Public Foundation

• Governance: More than 50% of the board members must be independent (at arm’s length).
• Funding: Receives donations from multiple sources; no single donor can contribute more than 50% of funding.
• Disbursement Requirements: Must allocate over 50% of annual funds to other qualified charities.

Private Foundation

• Governance: Typically controlled by a single family or small group; more than 50% of board members may be related or not at arm’s length.
• Funding: Can receive most (or all) of its funding from a single donor, family, or closely connected group.
• Flexibility: Can either fund other charities or run its own charitable programs.

Private Foundation Rules in Canada

If you’re considering setting up a private foundation, it’s important to understand the regulations:

• Must meet annual disbursement quota (currently 3.5% of investment assets).
• Subject to stricter compliance rules than public foundations.
• Donations receive tax benefits, making them attractive for high-net-worth individuals.

Which Is Better: A Donor-Advised Fund or a Private Foundation?

Many donors debate whether to use a donor-advised fund (DAF) or register a private foundation. Here’s a quick comparison:

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A private foundation is ideal for those who want full control and long-term family involvement, while a donor-advised fund offers simplicity and lower costs.

What Is a Private Foundation for Tax Purposes?

For tax purposes, a private foundation is a registered charity with specific CRA rules:

• Tax receipts can be issued for donations.
• Subject to penalties if disbursement quotas are not met.
• Investment income is tax-exempt if used for charitable purposes.

How to Start a Private Foundation in Canada

1. Choose a Structure: Decide between a trust or corporation.
2. Apply for Registration: Submit an application to the CRA (previously Form T2050).
3. Develop Governance Policies: Establish bylaws and a board.
4. Meet Ongoing Compliance: File annual T3010 returns and adhere to disbursement rules.

Need Help Setting Up a Foundation?

Whether you’re exploring a public foundation, a private foundation, or a donor-advised fund, our experienced Foundation Lawyers can guide you through the process.

Call us at 416-488-5888

Email: ask@charitylawgroup.ca

Let us help you establish your foundation on solid legal footing while maximizing tax benefits and philanthropic impact.

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